Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Shrink! Buybacks of 5 Undervalued Stocks

These companies are buying back their shares. Should you join them?

Stock buybacks are generally considered a bullish signal on Wall Street. They often announce management's belief that its company's stock is cheap and that its own shares will provide its best return on investment. Like dividends, buybacks also let companies return capital to shareholders.

How buybacks workDone right, share repurchases will increase earnings per share, as long as profits stay at least at the same level. A company with $1 million in earnings and 1 million shares outstanding will have earnings per share of $1. Now, if it buys back 250,000 shares and leaves only 750,000 shares outstanding -- and total profits remain $1 million -- its new EPS would be $1.33, or $1 million divided by 750,000.

We're seeking companies that have announced stock-buyback programs. Then we'll head over to Motley Fool CAPS to get some insight into the 70,000-strong investor community's preferred picks. If companies announce stock buybacks, and CAPS' top investors endorse their future prospects, Fools should take notice.

Here are some of the latest companies to announce share-repurchase programs.

Company

Buyback Announcement Date

Amount of Buyback

CAPS Rating (Out of 5)

Ship Finance International (NYSE:SFL)

10/19/2007

7 million shares

*****

First Horizon National (NYSE:FHN)

10/16/2007

7.5 million shares

**

Black & Decker (NYSE:BDK)

10/17/2007

4 million shares

**

Rimage (NASDAQ:RIMG)

10/18/2007

500,000 shares

***

Hartmarx (NYSE:HMX)

10/18/2007

3 million shares

**

Sources: Company press releases, Motley Fool CAPS.

The CAPS AdvantageInvestors at CAPS seem to have pretty dour opinion of this group of companies announcing buyback programs -- only one of the five garners anything above the average three-star rating.

Bermuda-based oil-tanker operator Ship Finance International is the CAPS favorite here. This spinoff of Frontline (NYSE:FRO) has been slowly selling off its single-hull fleet and has cut its share down to nine such ships, half the number it had last year. It trades at two-thirds of the multiple that industry leader Teekay (NYSE:TK) sports, yet at 8.3%, it pays a yield about eight times greater than that of its rival.

Top-rated All-Star SokorScout notes that this company has consistently outperformed since it was spun off and should continue to do so because of conservative management.

When [Frontline] let this little birdie out of the nest, all it has done since is fly. ... This operation manages, leases, [and] finances the [building] and repairing of ships. [It] has double-hull, dry cargo, and several special use ships that are deployed for use, even before they are built [or] taken in to be rehabilitated or retrofitted. SFL appears to be financially more conservative, but aggressively operated. ... It is my prediction that this recently liberated typhoon will soon lead the pack.

If there are any doubts about this company, it seems that they involve macroeconomic factors more than issues specific to Ship Finance. For that reason, we could see current CAPS investor bear DaveOfDuke become a bull next year: "The analyst expects tanker rates to even out throughout the rest of the year, and then to turn around in 2008 and 2009," he writes.

With the company's shares trading at a 15% discount to their 52-week high, possibly fueled in part by a drop in shipping rates, management seems to think its stock is cheap.

Foolish falloutBull or bear, for or against, Motley Fool CAPS is a completely free, fun service where more than 70,000 investors have their say every day. You've heard from your fellow investors; now's your chance to say your piece. Sign up today, and give us your best pitch for why your favorite stock will beat the market.

Author

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.